The Fall of the World's First Listed Company

Hi everyone, welcome to Cold-Knowledge Blind Box. In the last episode we talked about the Dutch East India Company, the world's first listed company, and how humanity got the key to open the box of modern capital markets. While it promoted globalization, it also awakened the wild beast at the bottom of human nature: speculation.

Economic bubbles and economic crises followed. The various ways modern finance fleeces retail investors, like short selling, insider trading and pumping up a stock price before dumping it, already had their early forms in the 17th century.

In this episode of Cold-Knowledge Blind Box, let's talk about how the world was turned upside down after the first stock exchange came into being.

The business model of the Dutch East India Company was very simple: raise funds, build ships, and sail out. When the ships came back, you sold the goods they brought home on the market, and after subtracting the costs, what was left was the company's profit. The routes were fixed, and once you set the departure time, you could more or less work out when they would return. In other words, as long as a ship came back, you were sure to make a big profit.

The most common play in the modern financial market is letting fake news move the trading.

Suppose you want to increase your profit. For example, you want to buy a large amount of stock, but you don't want to buy at a high price. What should you do?

Simple: you just make up a story that a ship ran into a disaster at sea and will never come back. But words alone prove nothing, and back then there were no newspapers and no social media. How could you get the news out? This is where we rely on the most basic code of human nature: everyone loves to gossip. The Amsterdam Stock Exchange was only 200 meters from the famous red-light district, which was originally set up mainly to serve sailors on long voyages. So this was where the news spread fastest.

A common trick was to invent an English sailor. While he was rounding the Cape of Good Hope, he saw the wreck of a ship smashed by a storm and run aground. The smell from the ship could be sensed several nautical miles away. A flag, faintly visible, carried the Dutch East India Company's banner, but it was tattered beyond recognition. The news didn't need to be precise, it only had to sound convincing, and rumors would take off. Once the chain reaction started, investors who didn't know what was going on would sell their shares in a frenzy, the stock price would plunge, and you could take the chance to buy a large amount of stock.

This little trick is still a common routine today. Let's move on to a more advanced play: short selling.

Among the company's founding shareholders was a man named Isaac Le Maire. We'll call him Brother Le from now on. Brother Le was the largest individual shareholder in the company at the time, holding 2.2% of the equity. Unfortunately, he didn't always play fair. When he falsified data in the cargo records, he was caught and kicked out of the management. In business, many innovations are born out of a person who never thought about the consequences for the future, and simply couldn't swallow the humiliation. Brother Le had been looking for a chance to get back at the East India Company, and at the same time he wanted to make a profit. He thought and thought about what to do. As he gazed at the large number of shares he owned, a bold idea was born.

He wrote a note to the other shareholders, using all of his assets as collateral: "You lend me your shares, and when the term ends, I'll return your shares, and I'll also pay you interest." It was all written in black and white, so there was no cheating.

He felt one person's power was not enough, so he used his connections to find other rich merchants and said, "Let's all borrow as many shares as we can, then sell them together at high prices on the market to create a trend. When the stock price falls, we'll buy these shares back." They formed a short-selling group among themselves. And Brother Le felt that simply selling wasn't enough. He also had to back it up with false news.

King Henry IV of France had long coveted the Dutch East India Company. He had always wanted to set up his own East India Company and get a slice of the Age of Exploration. But the routes were the same, and if there was one more competitor, it would certainly squeeze out the business of the Dutch East India Company. At this point, Brother Le went to France, and when he came back, he spread his private conversation with Henry IV throughout his social circle. The stock price instantly dropped 13%. Just as this group was about to reap the fruits of its labor, a variable appeared. As the news spread farther and farther, the Dutch government decided to take a stake in the Dutch East India Company, and the bailout began! Does this pattern look familiar?

The Dutch government didn't pay money for its stake. It gave policy instead. The first item: restrict short selling. And it also granted the company the power to wage war with foreign countries, to try prisoners freely, to negotiate with foreign countries, to build fortresses and establish colonies, and to issue its own currency.

In a sense, the Dutch East India Company now effectively represented the Dutch state, and it seized enormous wealth. The large flow of capital also led to the founding of the Amsterdam Bank, which became the financial center of Europe. Every European could come there to save money and take out loans.

But once people earn money, they start to get carried away. The Dutch did not think their interests were tied to the nation. While the Netherlands was locked in an 80-year war with Spain, Spain was able to seamlessly obtain loans from Dutch banks. And even with the money it borrowed, Spain was still knocked flat. Yet the Dutch merchants were still feeling smug: look, we follow the principle that capital has no borders, and we can still safeguard the Dutch victory.

Then the English came in. To compete for control of the trade routes, the English and the Dutch fought four wars, big and small. To fully support the wars, the English offered interest above market rates on deposits in Dutch banks, and issued government bonds with very high interest. Every time a Dutch East India Company merchant ship was sunk by the English at sea, the shareholders of the East India Company handed over their entire fortunes to the English.

When the war was won, the English simply announced that they refused to pay those interest payments. What could the Dutch do about it? The financial center of Europe also moved to London. And the Dutch East India Company collapsed from that point on.

That's where this episode of Cold-Knowledge Blind Box ends. If you have any other curious facts you'd like to hear, you can find NIO Radio's Shenzhen city channel in the community section of the NIO app's Friends tab, and share the trivia you love with everyone.

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